The Buy Now Pay Later Divide: Merchant Heterogeneity and Market Structure

We examine who benefits from Buy Now Pay Later (BNPL) services and how these services shape market structure. Using novel transaction-level data from a large fintech lender and a shift-share instrumental variable, we find that BNPL adoption increases revenue growth of small, credit-constrained merchants over three times more than that of large ones. Digitization-driven formalization channel contributes to this disparity: BNPL shifts transactions from cash to digital, generating verifiable records that enable previously excluded merchants to access formal credit. BNPL improves not just credit access but credit allocation—despite expanded lending, default rates decline. Spillover effects on non-adopting merchants are negative but an order of magnitude smaller than adopter gains, suggesting BNPL predominantly expands the market rather than only redistributing existing demand. Yet, while BNPL reduces concentration among adopters by disproportionately benefiting small, constrained firms, overall market concentration increases as non-adopters—who are systematically smaller—bear these negative spillovers, highlighting that adoption barriers shape the aggregate distributional impact of fintech payment innovations.